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| {{short description|American former securities trader (born 1958)}} | |||
| '''Joseph Jett''' is the Managing Partner of Jett Capital Management. <ref> New York Post, February 24, 2010</ref> Jett is a recognized industry leader and expert in Private Equity and Alternative Investments.<ref></ref> Jett has made numerous television appearances providing market commentary on such influential business shows as ''CNN Moneyline'', ''Your World with Neil Cavuto'' and ''Geraldo at Large'' with Geraldo Rivera.<ref></ref> | |||
| {{for|the Arkansas politician|Joe Jett}} | |||
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| | name = Orlando Joseph Jett | |||
| Jett is an acclaimed public speaker appearing at such finance industry venues as ''Kingpins of Wall Street'' hosted by noted lawyer, Raul Felder, and famed comedian, Jackie Mason; Global Summit for Private Equity Conference<ref></ref> and has spoken at several of the nation's top business schools including Harvard, NYU, Wharton and Stanford. | |||
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| Jett has authored two books <ref> Amazon.com</ref> about his life and experience in the financial markets. The first, "Black and White on Wall Street", was published by ]. The second, "Broken Bonds" was published by ]. | |||
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| | birth_date = 1958 | |||
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| In the early 1990's Jett was perhaps best known for his role in the ] ] in 1994.<ref name=SECopinion>, U.S. Securities and Exchange Commission, March 5, 2004</ref> At the time of the loss it was the largest alleged trading fraud in history.<ref> New York Post, February 24, 2010</ref> | |||
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| | occupation = Securities trader | |||
| | education = ], ] | |||
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| '''Orlando Joseph Jett''' (born 1958)<ref>{{Cite web|url=http://observer.com/1999/04/the-othello-of-kidder-peabody-spins-his-side-of-the-story|title = The Othello of Kidder Peabody Spins His Side of the Story| website=] |date = 5 April 1999}}</ref> is an American former securities trader, known for his role in the ] ] in 1994.<ref name=SECopinion>, U.S. Securities and Exchange Commission, March 5, 2004</ref> At the time of the loss it was the largest trading fraud in history.<ref> {{webarchive|url=https://web.archive.org/web/20100227182438/http://www.nypost.com/p/news/business/leer_jett_case_Tpr7lb0hZMJW1MFkO9mfyJ |date=2010-02-27 }} New York Post, February 24, 2010</ref> | |||
| ==Jett's background== | ==Jett's background== | ||
| Joseph Jett grew up near ]. He earned his bachelor's and master's degrees in chemical engineering at ] and after working two years at GE Plastics went on to earn an MBA from ].<ref name=Derailment> New York Times, June 5, 1994</ref> Jett was hired by Kidder, Peabody & Co in July 1991. At the time he was 33 years old. He had worked previously as a bond trader at ] for two years and at ] for eighteen months.<ref>"Did He or Didn't He", 60 Minutes aired 2-19-95</ref> | |||
| Joseph Jett grew up near Cleveland, Ohio. At age of 8, he began working as a paperboy. During high school he worked as a dishwasher and short order cook at a steakhouse. The son of a conservative businessman, Jett was a fan of Richard Nixon, worked in Ronald Reagan’s 1980 Presidential campaign and disdained affirmative action programs so much that he refused to identify his race on his application to the Harvard Graduate School of Business Administration. He was picked on by fellow blacks whom he constantly challenged to do better. In ninth grade, Jett stepped onto a basketball court at a city park and stole the ball proclaiming, "It's time that we as a people stop making baskets and start making A's!" He was beaten up for his efforts. To defend himself, he became a dedicated disciple of weightlifting and the martial arts.<ref>"Brains and Brawn Of a Professed Nerd" New York Times; Jun 5, 1994</ref> | |||
| Jett earned bachelor's and master's degrees in Chemical Engineering at ] and after working two years at GE Plastics went on to ].<ref>"Brains and Brawn Of a Professed Nerd" New York Times; Jun 5, 1994</ref> In his book Black and White, Joseph Jett states that his Harvard MBA degree was not awarded due to his failure to pay final college tuition, which he was not aware of, and which the New York Times reported in 1994.<ref> New York Times, April 22, 1994</ref> He finally paid for his tuition and was awarded his MBA degree in 1987. A confirmation from Emily Hayden, a Harvard MBA representative and the Harvard MBA school confirmed that Joseph Jett was indeed awarded a Harvard MBA in 1987.<ref></ref> Jett was hired by Kidder, Peabody & Co in July 1991. At the time he was 33 years old. He had worked previously as a bond trader at ] for two years and at ] for eighteen months. <ref>"Did He or Didn't He", 60 Minutes aired 2-19-95</ref> | |||
| ==Kidder Peabody== | ==Kidder Peabody== | ||
| At the time of Jett's employment, ] was owned by ], who had purchased the firm in 1986. In 1994, after numerous losses including those related to Jett, the firm was hurriedly sold to ]. After the acquisition, the Kidder Peabody name was dropped. | |||
| In 1994, following a number of scandals and losses in the fixed income department, the investment bank Kidder, Peabody & Co. was hurriedly sold to Paine Webber. On April 17, 1994, GE CEO ] identified Jett on the GE-owned TV network ] as a ] who had singlehandedly caused $250 million in losses. | |||
| ==Jett’s trading strategy== | ==Jett’s trading strategy== | ||
| Jett's primary strategy was to exploit a flaw in Kidder's computer systems that made unprofitable trades appear profitable. | |||
| <blockquote> | |||
| In his book "Black and White on Wall Street" Jett explained that his primary trading strategy was to trade massively to exploit an anomaly in the relation of cash bonds to their derivative futures market. Jett's trading position approached a staggering $50 Billion.<ref>Andrew Bary, “Kidder Had "Lax" Oversight of Jett? Looks More Like No Oversight”, Barron's, August 8, 1994</ref> The anomaly was caused by the Clinton administration's abrupt decision to have semi-annual rather than quarterly issues of the long bond. | |||
| "There were virtually no genuine profitable trades. Joseph Jett, Kidder, Peabody's former bond-trading star, simply made up trades and marked them down as having made money. In the meantime, his few real trades consistently lost money." | |||
| - Floyd Norris in the New York Times<ref> ''New York Times'', August 5, 1994</ref> | |||
| For nine months, scarcity of the cash bond created a situation where the cheapest to deliver security into the futures market was a callable security with a duration of merely 9 years. Jett purchased the STRIP components of the cash bond with a 30 year duration and sold short futures against his cash holdings. | |||
| </blockquote> | |||
| The trades used in constructing the phony profits were forward reconstitutions of US ]. The transaction is executed when a trader buys a set of Treasury STRIPS sufficient to re-create the original bond from which they were derived. | |||
| Due to the difference in duration, Jett had on a massive yield curve play in a basis trade. Jett's supervisor Ed Cerullo was a recognized expert in ].<ref>Andrew Bary, “Kidder Had "Lax" Oversight of Jett? Looks More Like No Oversight”, Barron's, August 8, 1994</ref> Jett argued successfully to the NASD that his long cash profit's outweighed any loss from the shorter duration futures position and that his trades were profitable. Jett claimed that Kidder had forced the appearance of losses by redefining "unrealized profits" common to both Jett's forward trades and Kidder's massive CMO operation as "unrealizable profits" only for those trades in Jett's position. | |||
| Kidder's system incorrectly valued forward-dated transactions as if they were immediately settled, rather than taking into account the ] for the period before settlement of the trade. The method Jett followed was facilitated by this error. By buying US Treasury bond STRIPS (whose price increases each day due to ]), hedged by a ] Treasury bond position (whose price remains relatively stable over the settlement period), Jett was able to book immediate, illusory profits. Once settlement of the trade happened, any false profits immediately were reversed as a loss. Therefore, in order to continue to appear profitable, Jett had to engage in more and more such trades, enough to both offset the losses on the settling trades plus additional trades to keep delivering profits. For the scheme to persist, the size had to continually grow, and this is what eventually brought the scheme's downfall—Jett's trading size had become so large that General Electric, the owner of Kidder Peabody at the time, asked that he cut the size of his positions because of the bloating of GE's balance sheet. With no new trades to offset those settling and rolling off, the losses became apparent to Kidder senior management.<ref name=SECopinion/> | |||
| Jett's STRIP trading was in fact quite profitable. The SEC ruled that as all of Jett's alleged losses were from the short futures position, which are not securities per se, that Jett was not guilty of securities fraud.<ref name=InitialDecision> Securities and Exchange Commission, July 21, 1998</ref> | |||
| Jett, who was previously a marginally profitable trader, started earning large bonuses once he began executing the trades that exploited the system flaw. While in 1991, Jett was paid a bonus of $5000, in 1992 and 1993 he was paid $2.1 million and $9.3 million respectively.<ref name=InitialDecision> Securities and Exchange Commission, July 21, 1998</ref> The board of General Electric, who had owned Kidder Peabody since 1986, had to approve the outsized $9.3 million bonus in 1993.<ref name=Welch>Jack Welch and John A. Byrne, ''Jack: Straight from the Gut'' (New York, New York: Grand Central Publishing, 2003), .</ref> | |||
| Kidder held that Jett's primary strategy was to exploit a flaw in Kidder's computer systems that made unprofitable trades appear profitable. The trades used in constructing the phony profits were forward reconstitutions of US Treasury bonds. The transaction is executed when a trader buys a set of treasury strips sufficient to re-create the original bond that they were derived from. | |||
| In the first quarter of 1994, Jett was "trading" so frequently that Kidder's computer systems couldn't keep up, and his "profits" had grown to $350 million, large enough that Kidder management feared he was taking unacceptable risks.<ref name=Derailment/><ref name=SECopinion/> Computer specialists began noticing that none of Jett's supposed "trades" were ever consummated. It eventually emerged that Jett rolled trades over two to three days before he was due to settle up, but kept the profits on the books. Kidder halted Jett's trading and summoned Jett to a meeting. When his explanations proved unsatisfactory, he was fired. The losses were large enough that parent GE had to take a $210 million charge to its first-quarter earnings.<ref name=Derailment/> | |||
| Kidder's system incorrectly valued forward-dated transactions as if they were immediately settled, rather than taking into account the time value of money for the period before settlement of the trade. The method Jett followed was facilitated by this error. By buying US Treasury bond strips (whose price increases each day due to accretion), hedged by a short treasury bond position (whose price remains relatively stable over the settlement period), Jett was able to book immediate, illusory profits. Once settlement of the trade happened, any false profits immediately were reversed as a loss. Therefore, in order to continue to appear profitable, Jett had to engage in more and more such trades, enough to both offset the losses on the settling trades plus additional trades to keep delivering profits. For the scheme to persist, the size had to continually grow, and this is what eventually brought the scheme's downfall—Jett's trading size had become so large that General Electric, the owner of Kidder Peabody at the time, asked that he cut the size of his positions because of the bloating of GE's balance sheet. With no new trades to offset those settling and rolling off, the losses became apparent to Kidder senior management.<ref name=SECopinion/> | |||
| Later, in his autobiography ''Straight from the Gut'', longtime GE chairman ] would lament not following his normal practice of personally looking into how one of his employees could become so successful so quickly. He also recalled GE business leaders were so shaken by the size of the loss that they were willing to dip into the coffers of their own divisions to close the gap. In contrast, Welch said, no one at Kidder was willing to take responsibility for the debacle; most Kidder staffers were concerned about the effect on their bonuses. This convinced Welch that Kidder's culture did not fit with that of GE, and led him to sell off Kidder later that year.<ref name=Welch/> | |||
| Jett, who was previously a moderately profitable trader, started earning large bonuses once he began executing the trades that exploited the system flaw. While in 1991 Jett was paid a bonus of $5000, in 1992 and 1993 he was paid $2.1 million and $9.3 million respectively.<ref name=InitialDecision> Securities and Exchange Commission, July 21, 1998</ref> The board of General Electric, who had owned Kidder Peabody since 1986, had to approve the $9.3 million outsized bonus in 1993. Later, in his autobiography "Straight from the Gut," Jack Welch would lament not personally looking into how one of his employees could become so successful so quickly. | |||
| == The Lynch Report== | == The Lynch Report== | ||
| As the scandal first came to light, Kidder Peabody hired lawyer ] from the law firm of ], the former enforcement chief of the ], to conduct an internal investigation. The result was an 86-page document that became known as the Lynch Report. The report was released in August 1994 and concluded that Jett acted alone, but also blamed the losses on a complete breakdown of the system of supervision at Kidder, particularly with regard to Ed Cerullo and Melvin Mullin.<ref> New York Times, August 5, 1994</ref> | |||
| As the scandal first came to light, Kidder Peabody hired lawyer Gary G. Lynch from the law firm of ], the former enforcement chief of the Securities and Exchange Commission, to conduct an internal investigation. The result was an 86 page document that became known as the Lynch Report. The report was released in August 1994 and concluded that Jett acted alone, but also blamed the losses on a complete breakdown of the system of supervision at Kidder, particularly with regard to Ed Cerullo and Melvin Mullin.<ref> New York Times, August 5, 1994</ref> | |||
| "Jett was provided the opportunity to generate false profits by trading and accounting systems," Mr. Lynch wrote. "It was his supervisors, however, who allowed Jett that opportunity for over two years because they never understood Jett's daily trading activity or the source of his apparent profitability. Instead, their focus was on profit and loss and risk-management data that provided no insight into the mechanics of Jett's trading." | "Jett was provided the opportunity to generate false profits by trading and accounting systems," Mr. Lynch wrote. "It was his supervisors, however, who allowed Jett that opportunity for over two years because they never understood Jett's daily trading activity or the source of his apparent profitability. Instead, their focus was on profit and loss and risk-management data that provided no insight into the mechanics of Jett's trading." | ||
| The use of Gary Lynch to conduct the internal investigation was controversial, as |
The use of Gary Lynch to conduct the internal investigation was controversial, as Lynch was also the lawyer hired by Kidder Peabody to represent the firm in its case against Jett.<ref> New York Times, September 3, 1996</ref> | ||
| ==Regulatory organization charges and decisions== | |||
| Handwritten notes by Davis Polk law firm partner Larry Portnoy, written after interviewing numerous Kidder executives, stated: | |||
| The ], the ], and the ] all were involved in the various actions around the Jett case, since they all had some regulatory authority over Kidder Peabody. | |||
| “Not really false profits. Rather advanced profits. We didn’t view it as false. Just accelerated. So CF (Lead Accountant Charles Fiumefreddo) didn’t see it as a phony profit issue.<ref>Paul Tharp, “Jett: Looks Like He's in the Clear”, The New York Post, June 20, 1996</ref> | |||
| The New York Stock Exchange acted first, by barring Jett from trading securities or working for any employer affiliated with the exchange. The NYSE's action effectively blackballed Jett from the securities industry.<ref> New York Times, December 1, 1994</ref> | |||
| David Bernstein was assistant to Edward A. Cerullo, Kidder’s fixed-income chief. According to notes from an interview with lawyers for Kidder, Bernstein said that “Kidder can’t deny that 100-plus people knew that forward trades with Fed took place. Issue is it had P&L effect.” Other notes record him saying they were “not really false profits.”<ref> Gary Weiss, Business Week, July 1, 1996</ref> | |||
| The NASD was involved in the dispute over Jett's bonuses, which were frozen in an account held by Kidder Peabody. In 1996, a NASD arbitration panel rejected Kidder Peabody's monetary claims against Jett and ordered the funds from Jett's personal accounts to be released. Kidder had sought $8.2 million for undeserved bonuses and $74.6 million for trading losses incurred by Kidder. The $74.6 million sought by Kidder was the amount of the actual losses, rather than the total false gains of $350 million.<ref>Jett Scores Against Kidder Peabody as Panel Rejects Firm's Money Claims, Anita Raghavan, The Wall Street Journal, December 20, 1996, Page C23</ref> Although the bonuses from Jett's trading had totaled $11.4 million, the accounts contained approximately $5 million due to deduction of ] (which the panel ruled, did not have to be paid to Jett) and taxes due.<ref name=SECopinion/> In a Salon.com interview from 1999, Jett said that ultimately $4.5 million was returned to him in 1998.<ref> {{webarchive|url=https://web.archive.org/web/20110629115501/http://www.salon.com/books/int/1999/05/27/jett/print.html |date=2011-06-29 }}</ref> | |||
| ==Aftermath and timeline of litigation== | |||
| '''April 1994:''' Scheme is discovered. Kidder reverses over $340 million in trading profits from Jett's trading. Kidder fires Jett and freezes the funds in his personal accounts, which he had kept with the securities firm. | |||
| The ] investigated the losses from 1994 onward, and in 1998 released an initial ruling that Jett did not commit securities fraud, but charged him with a lesser record-keeping violation.<ref name=InitialDecision/> | |||
| '''June 1994:''' Kidder's CEO Michael Carpenter is fired in the wake of the scandal.<ref> New York Times, June 23, 1994</ref> | |||
| '''November 1994:''' The New York Stock Exchange banishes Jett from trading securities or working for any employer affiliated with the exchange.<ref> New York Times, December 1, 1994</ref> | |||
| '''January 1996:''' Jett's supervisor, Ed Cerullo, agrees to a settlement with the SEC for failing to supervise Jett.<ref> US Securities and Exchange Commission, Jan 9, 1996</ref> He agrees to a fine of $50,000 and a suspension from the industry for one year.<ref> New York Times, April 6, 1997</ref> | |||
| '''August 1996:''' Another former boss of Jett's, Melvin Mullin, is fined $25,000 with a three month suspension, also for failing to supervise.<ref> New York Times, August 1, 1996</ref> | |||
| '''December 1996:''' A NASD arbitration panel rejects Kidder Peabody's monetary claims against him and orders the funds from Jett's personal accounts to be released. Kidder had sought $8.2 million for undeserved bonuses and $74.6 million for trading losses incurred by Kidder as a result of Mr. Jett's alleged misconduct. The $74.6 million sought by Kidder was the amount of the actual losses, rather than the total false gains of $350 million. | |||
| "This is about as clean a bill of health they could have given Jett," said Alan Bromberg, a securities-law professor at Southern Methodist University. By rejecting the monetary claims, he added, the panel is saying "all of the things that he is accused of doing wrong, he either didn't do or it didn't hurt Kidder." <ref>Jett Scores Against Kidder Peabody as Panel Rejects Firm's Money Claims, Anita Raghavan, The Wall Street Journal, December 20, 1996, Page C23</ref> | |||
| Although the bonuses from the alleged fraud had totaled $11.4 million, the accounts contained approximately $5 million due to deduction of deferred compensation (which the panel ruled, did not have to be paid to Jett) and taxes due.<ref name=SECopinion/> In a Salon interview from 1999, Jett said that ultimately $5.6 million was returned to him in 1998. | |||
| '''July 1998:''' The ] rules that Jett did not commit securities fraud, but charges him with a lesser record-keeping violation.<ref name=InitialDecision/> | |||
| <blockquote> | <blockquote> | ||
| "This Initial Decision finds that, for over two years, Mr. Jett exploited an anomaly in Kidder’s software, in the manner of a pyramid scheme, that credited him on Kidder’s books with enormous, but illusory, profits. He did this with intent to defraud."</blockquote> | "This Initial Decision finds that, for over two years, Mr. Jett exploited an anomaly in Kidder’s software, in the manner of a ], that credited him on Kidder’s books with enormous, but illusory, profits. He did this with intent to defraud."</blockquote> | ||
| The |
The SEC ordered Jett to forfeit his $8.2 million in bonuses associated with the false profits, fined him $200,000, and barred him from any future association with a securities broker or dealer. | ||
| Both Jett and the SEC's Enforcement Division appealed the decision. In March 2004 the SEC finally ruled on the appeal, and concluded that, in addition to upholding the record-keeping violation, Jett had also committed securities fraud. Specifically, they found that Jett committed fraud by deliberately exploiting weaknesses in Kidder Peabody's automated trading records system in order to book fake profits of about $264 million (when he had actually lost the firm about $75 million). The Commission re-affirmed the penalty that Jett forfeit $8.2 million in fraudulently-obtained bonuses, plus the fine of $200,000 and a lifetime ban from the securities industry.<ref name="SECopinion"/> However, the NYSE's decision to ban him from any company affiliated with the exchange had effectively ended his career in the industry even before the SEC's action. | |||
| Jett never appealed the 2004 SEC decision, even though he had the right to do so. In 2006, when the SEC was seeking an enforcement action against Jett in the United States District Court for the |
Jett never appealed the 2004 SEC decision, even though he had the right to do so. In 2006, when the SEC was seeking an enforcement action against Jett in the United States District Court for the 2004 decision, Jett sent a memorandum to the court saying that he had never received notice from the SEC as to their 2004 decision since the order had been sent to his old address. He sent another filing saying he was unaware of the 2004 decision being made and therefore had no chance to appeal. The District Court rejected this when they found that Jett had been quoted in a New York Times article shortly after the 2004 decision was announced, saying that he was unconcerned with the SEC action since he was still legal to trade securities offshore.<ref> {{webarchive|url=https://web.archive.org/web/20110718015207/http://www.websupp.com/data/SDNY/1%3A06-cv-13723-23-SDNY.pdf |date=2011-07-18 }} United States District Court (Southern District of New York), September 7th 2007</ref> | ||
| The SEC released an enforcement action against Jett in 2007,<ref> U.S. Securities and Exchange Commission, September 11, 2007</ref> ordering him to pay the fines due.<ref> Portfolio.com, September 11, 2007</ref> | |||
| The US Attorney's office investigated Jett, but no criminal charges were ever filed.<ref name="SECopinion"/> | |||
| '''October 2009:''' The SEC investigates Jett for violation of the previous sanction, due to the appearance of him operating a broker/dealer called "Jett Capital." The SEC finds during the investigation that Jett Capital has no clients and has conducted no trading of securities, and therefore Jett has not violated the order. | |||
| ==Jett's post-Kidder career== | ==Jett's post-Kidder career== | ||
| Jett has written two books<ref> Amazon.com</ref> about his life and experience at Kidder Peabody. | |||
| Jett has claimed to operate a hedge fund called Cambridge Matrix Funds,<ref> {{webarchive|url=https://web.archive.org/web/20110629115501/http://www.salon.com/books/int/1999/05/27/jett/print.html |date=2011-06-29 }} Salon.com May 27, 1999</ref> domiciled in the British Virgin Islands.<ref> Business Week, May 12, 1999 | |||
| Jett told ''The New York Times'' in 2004 that he gets between $4,000 and $8,000 per appearance on the lecture circuit. | |||
| </ref> However, the BVI Financial Services Commission, the regulator of such funds, has no listing for Cambridge Matrix in its comprehensive list of funds domiciled in the BVI.<ref> British Virgin Islands Financial Services Commission</ref> | |||
| Jett told ''The New York Times'' in 2004 that he gets between $4,000 and $8,000 per appearance on the lecture circuit.<ref> New York Times, 2 May 2004</ref> | |||
| He currently operates a firm called Jett Capital Management LLC.<ref> Susan Antilla, Bloomberg News, Feb 4 2009</ref> | |||
| He currently operates a firm called Jett Capital Management LLC.<ref> Susan Antilla, Bloomberg News, Feb 4 2009</ref> According to its website, the firm offers asset management, advisory, and private equity services, though it is unclear how Jett is able to perform these functions while being permanently barred from the securities industry.<ref>jettcapital.com</ref> | |||
| In July 2008, the French news channel ] televised a feature following the ] trading losses, which featured an extensive interview with Jett. In it, Jett said that because of legal costs he has no money left to pay the SEC fines, and that he was living in the basement of an ex-girlfriend's house in Princeton, New Jersey. The France24 reporter said that Jett is running a financial consultancy domiciled offshore, which conducts its business from hired conference suites in New Jersey. The show televised Jett meeting with a client who was trying to raise $9 million for a business venture. At the conclusion of the report, the commentator said she believed that Jett was trying to use the France 24 program to show the SEC that he has no money to pay the fines due, but this may have been Jett trying to manipulate France24 and the SEC.<ref> France24 Network, July 18, 2008</ref> | |||
| In July 2008, the French news channel ] televised a feature following the ] trading losses, which featured an extensive interview with Jett. In it, Jett said that because of legal costs he has no money left to pay the SEC fines, and that he was living in the basement of an ex-girlfriend's house in Princeton, New Jersey. The France24 reporter said that Jett is running a financial consultancy domiciled offshore, which conducts its business from hired conference suites in New Jersey. The show televised Jett meeting with a client who was trying to raise $9 million for a business venture. At the conclusion of the report, the commentator said she believed that Jett was trying to use the France 24 program to show the SEC that he has no money to pay the fines due.<ref> {{webarchive|url=https://web.archive.org/web/20080825003959/http://www.france24.com/en/20080718-reporters-banking-crime-trader-joe-jett-kerviel-wall-street |date=2008-08-25 }} France24 Network, July 18, 2008</ref> | |||
| ==References== | ==References== | ||
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| Also see ] | Also see ] | ||
| {{Authority control}} | |||
| {{DEFAULTSORT:Jett, Joseph}} | {{DEFAULTSORT:Jett, Joseph}} | ||
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Latest revision as of 04:37, 22 August 2024
American former securities trader (born 1958) For the Arkansas politician, see Joe Jett.| Orlando Joseph Jett | |
|---|---|
| Born | 1958 |
| Education | MIT, Harvard Business School |
| Occupation | Securities trader |
| Known for | Kidder, Peabody & Co. |
Orlando Joseph Jett (born 1958) is an American former securities trader, known for his role in the Kidder Peabody trading loss in 1994. At the time of the loss it was the largest trading fraud in history.
Jett's background
Joseph Jett grew up near Cleveland, Ohio. He earned his bachelor's and master's degrees in chemical engineering at MIT and after working two years at GE Plastics went on to earn an MBA from Harvard Business School. Jett was hired by Kidder, Peabody & Co in July 1991. At the time he was 33 years old. He had worked previously as a bond trader at Morgan Stanley for two years and at First Boston for eighteen months.
Kidder Peabody
At the time of Jett's employment, Kidder, Peabody & Co. was owned by General Electric Corporation, who had purchased the firm in 1986. In 1994, after numerous losses including those related to Jett, the firm was hurriedly sold to Paine Webber. After the acquisition, the Kidder Peabody name was dropped.
Jett’s trading strategy
Jett's primary strategy was to exploit a flaw in Kidder's computer systems that made unprofitable trades appear profitable.
"There were virtually no genuine profitable trades. Joseph Jett, Kidder, Peabody's former bond-trading star, simply made up trades and marked them down as having made money. In the meantime, his few real trades consistently lost money."
- Floyd Norris in the New York Times
The trades used in constructing the phony profits were forward reconstitutions of US Treasury bonds. The transaction is executed when a trader buys a set of Treasury STRIPS sufficient to re-create the original bond from which they were derived.
Kidder's system incorrectly valued forward-dated transactions as if they were immediately settled, rather than taking into account the time value of money for the period before settlement of the trade. The method Jett followed was facilitated by this error. By buying US Treasury bond STRIPS (whose price increases each day due to accretion), hedged by a short Treasury bond position (whose price remains relatively stable over the settlement period), Jett was able to book immediate, illusory profits. Once settlement of the trade happened, any false profits immediately were reversed as a loss. Therefore, in order to continue to appear profitable, Jett had to engage in more and more such trades, enough to both offset the losses on the settling trades plus additional trades to keep delivering profits. For the scheme to persist, the size had to continually grow, and this is what eventually brought the scheme's downfall—Jett's trading size had become so large that General Electric, the owner of Kidder Peabody at the time, asked that he cut the size of his positions because of the bloating of GE's balance sheet. With no new trades to offset those settling and rolling off, the losses became apparent to Kidder senior management.
Jett, who was previously a marginally profitable trader, started earning large bonuses once he began executing the trades that exploited the system flaw. While in 1991, Jett was paid a bonus of $5000, in 1992 and 1993 he was paid $2.1 million and $9.3 million respectively. The board of General Electric, who had owned Kidder Peabody since 1986, had to approve the outsized $9.3 million bonus in 1993.
In the first quarter of 1994, Jett was "trading" so frequently that Kidder's computer systems couldn't keep up, and his "profits" had grown to $350 million, large enough that Kidder management feared he was taking unacceptable risks. Computer specialists began noticing that none of Jett's supposed "trades" were ever consummated. It eventually emerged that Jett rolled trades over two to three days before he was due to settle up, but kept the profits on the books. Kidder halted Jett's trading and summoned Jett to a meeting. When his explanations proved unsatisfactory, he was fired. The losses were large enough that parent GE had to take a $210 million charge to its first-quarter earnings.
Later, in his autobiography Straight from the Gut, longtime GE chairman Jack Welch would lament not following his normal practice of personally looking into how one of his employees could become so successful so quickly. He also recalled GE business leaders were so shaken by the size of the loss that they were willing to dip into the coffers of their own divisions to close the gap. In contrast, Welch said, no one at Kidder was willing to take responsibility for the debacle; most Kidder staffers were concerned about the effect on their bonuses. This convinced Welch that Kidder's culture did not fit with that of GE, and led him to sell off Kidder later that year.
The Lynch Report
As the scandal first came to light, Kidder Peabody hired lawyer Gary G. Lynch from the law firm of Davis, Polk & Wardwell, the former enforcement chief of the Securities and Exchange Commission, to conduct an internal investigation. The result was an 86-page document that became known as the Lynch Report. The report was released in August 1994 and concluded that Jett acted alone, but also blamed the losses on a complete breakdown of the system of supervision at Kidder, particularly with regard to Ed Cerullo and Melvin Mullin.
"Jett was provided the opportunity to generate false profits by trading and accounting systems," Mr. Lynch wrote. "It was his supervisors, however, who allowed Jett that opportunity for over two years because they never understood Jett's daily trading activity or the source of his apparent profitability. Instead, their focus was on profit and loss and risk-management data that provided no insight into the mechanics of Jett's trading."
The use of Gary Lynch to conduct the internal investigation was controversial, as Lynch was also the lawyer hired by Kidder Peabody to represent the firm in its case against Jett.
Regulatory organization charges and decisions
The Securities and Exchange Commission, the National Association of Securities Dealers, and the New York Stock Exchange all were involved in the various actions around the Jett case, since they all had some regulatory authority over Kidder Peabody.
The New York Stock Exchange acted first, by barring Jett from trading securities or working for any employer affiliated with the exchange. The NYSE's action effectively blackballed Jett from the securities industry.
The NASD was involved in the dispute over Jett's bonuses, which were frozen in an account held by Kidder Peabody. In 1996, a NASD arbitration panel rejected Kidder Peabody's monetary claims against Jett and ordered the funds from Jett's personal accounts to be released. Kidder had sought $8.2 million for undeserved bonuses and $74.6 million for trading losses incurred by Kidder. The $74.6 million sought by Kidder was the amount of the actual losses, rather than the total false gains of $350 million. Although the bonuses from Jett's trading had totaled $11.4 million, the accounts contained approximately $5 million due to deduction of deferred compensation (which the panel ruled, did not have to be paid to Jett) and taxes due. In a Salon.com interview from 1999, Jett said that ultimately $4.5 million was returned to him in 1998.
The Securities and Exchange Commission investigated the losses from 1994 onward, and in 1998 released an initial ruling that Jett did not commit securities fraud, but charged him with a lesser record-keeping violation.
"This Initial Decision finds that, for over two years, Mr. Jett exploited an anomaly in Kidder’s software, in the manner of a pyramid scheme, that credited him on Kidder’s books with enormous, but illusory, profits. He did this with intent to defraud."
The SEC ordered Jett to forfeit his $8.2 million in bonuses associated with the false profits, fined him $200,000, and barred him from any future association with a securities broker or dealer.
Both Jett and the SEC's Enforcement Division appealed the decision. In March 2004 the SEC finally ruled on the appeal, and concluded that, in addition to upholding the record-keeping violation, Jett had also committed securities fraud. Specifically, they found that Jett committed fraud by deliberately exploiting weaknesses in Kidder Peabody's automated trading records system in order to book fake profits of about $264 million (when he had actually lost the firm about $75 million). The Commission re-affirmed the penalty that Jett forfeit $8.2 million in fraudulently-obtained bonuses, plus the fine of $200,000 and a lifetime ban from the securities industry. However, the NYSE's decision to ban him from any company affiliated with the exchange had effectively ended his career in the industry even before the SEC's action.
Jett never appealed the 2004 SEC decision, even though he had the right to do so. In 2006, when the SEC was seeking an enforcement action against Jett in the United States District Court for the 2004 decision, Jett sent a memorandum to the court saying that he had never received notice from the SEC as to their 2004 decision since the order had been sent to his old address. He sent another filing saying he was unaware of the 2004 decision being made and therefore had no chance to appeal. The District Court rejected this when they found that Jett had been quoted in a New York Times article shortly after the 2004 decision was announced, saying that he was unconcerned with the SEC action since he was still legal to trade securities offshore.
The SEC released an enforcement action against Jett in 2007, ordering him to pay the fines due.
The US Attorney's office investigated Jett, but no criminal charges were ever filed.
Jett's post-Kidder career
Jett has written two books about his life and experience at Kidder Peabody.
Jett has claimed to operate a hedge fund called Cambridge Matrix Funds, domiciled in the British Virgin Islands. However, the BVI Financial Services Commission, the regulator of such funds, has no listing for Cambridge Matrix in its comprehensive list of funds domiciled in the BVI.
Jett told The New York Times in 2004 that he gets between $4,000 and $8,000 per appearance on the lecture circuit.
He currently operates a firm called Jett Capital Management LLC. According to its website, the firm offers asset management, advisory, and private equity services, though it is unclear how Jett is able to perform these functions while being permanently barred from the securities industry.
In July 2008, the French news channel France 24 televised a feature following the Jérôme Kerviel trading losses, which featured an extensive interview with Jett. In it, Jett said that because of legal costs he has no money left to pay the SEC fines, and that he was living in the basement of an ex-girlfriend's house in Princeton, New Jersey. The France24 reporter said that Jett is running a financial consultancy domiciled offshore, which conducts its business from hired conference suites in New Jersey. The show televised Jett meeting with a client who was trying to raise $9 million for a business venture. At the conclusion of the report, the commentator said she believed that Jett was trying to use the France 24 program to show the SEC that he has no money to pay the fines due.
References
- "The Othello of Kidder Peabody Spins His Side of the Story". The New York Observer. 5 April 1999.
- ^ In the Matter of Orlando Joseph Jett, U.S. Securities and Exchange Commission, March 5, 2004
- Ex-Street Big Snared in Domestic, SEC Battles Archived 2010-02-27 at the Wayback Machine New York Post, February 24, 2010
- ^ Derailment On Wall Street -- A special report.; Fallen Bond Trader Sees Himself As an Outsider and a Scapegoat New York Times, June 5, 1994
- "Did He or Didn't He", 60 Minutes aired 2-19-95
- BEHIND THE KIDDER SCANDAL: NEWS ANALYSIS; How Profit was Created on Paper New York Times, August 5, 1994
- ^ Initial Decision of an SEC Administrative Law Judge In the Matter of Orlando Joseph Jett Securities and Exchange Commission, July 21, 1998
- ^ Jack Welch and John A. Byrne, Jack: Straight from the Gut (New York, New York: Grand Central Publishing, 2003), page 149-150.
- BEHIND THE KIDDER SCANDAL: THE OVERVIEW; Kidder Scandal Tied to Failure Of Supervision New York Times, August 5, 1994
- Gary Lynch, Defender of Companies, Has His Critics New York Times, September 3, 1996
- Big Board Acts Against Jett New York Times, December 1, 1994
- Jett Scores Against Kidder Peabody as Panel Rejects Firm's Money Claims, Anita Raghavan, The Wall Street Journal, December 20, 1996, Page C23
- Salon Interview | Wall Street lynching Archived 2011-06-29 at the Wayback Machine
- Memorandum Opinion Archived 2011-07-18 at the Wayback Machine United States District Court (Southern District of New York), September 7th 2007
- Court Enforces Commission's $8.21 Million Disgorgement Order against Orlando Joseph Jett U.S. Securities and Exchange Commission, September 11, 2007
- "Judge to Joe Jett: Pay Up," Portfolio.com, September 11, 2007
- Joseph Jett Bibliography Amazon.com
- Wall Street Lynching Archived 2011-06-29 at the Wayback Machine Salon.com May 27, 1999
- Joseph Jett: "Kidder Is Gone. I'm Still Standing" Business Week, May 12, 1999
- BVI Private Funds Directory British Virgin Islands Financial Services Commission
- Repentant? No. Bitter? Less. New York Times, 2 May 2004
- Monsieur Kerviel, Don't Delay Work on New Career Susan Antilla, Bloomberg News, Feb 4 2009
- jettcapital.com
- Joe Jett, a failed bet on Wall Street Archived 2008-08-25 at the Wayback Machine France24 Network, July 18, 2008
Also see List of Trading Losses
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